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The Problem of Housing Affordability Crisis

Discuss about the Housing affordability in NSW.

According to Langford (2016) housing affordability signifies the relationship between household incomes and expenditure on housing such as mortgage payments, rents and prices.  The term housing affordability is not the same as the term affordable housing which is in relation to social and low income housing. It has been argued by Baker, Mason and Bentley (2015) that there has been a significant decline in  the housing affordability  in Australia since the year 1980. A 78% increase has been depicted through the “price to income ratio index” provided by OECD between the year 1980 and 2015. The problem is even more acute in NSW in relation to which it has been indicated by the Parliamentary Library calculations that the ratio of median house prices to average disposable household income has become more than 7 in 2015 which was only 3.3 in 1981 (Jacobs 2016). The wide ratio is depicted through the graph below.  There have been many arguments which suggest that the issue of housing affordability in NSW is declining and properties are becoming more affordable in the light of increasing income and falling expenditure on housing. However the report analyzes the House price to Income ratio in NSW along with Growth of Income versus Growth in price of House and Property to highlight the affordability Crisis in NSW.

 

Dwelling price to income ratio

Source: (Jacobs 2016)

The expensive housing market of Sydney has forced emergency worker, teachers and nurses to leave the city and live in cupboards which have put the hospitals and schools at a staff shortage. People having low income are not able to afford a house in Sydney’s inner-city suburbs. These people can only afford to purchase homes after significant years of saving in the outskirts of the city which are also subjected to significant regulations in relation restriction on buildings (Gurran and Phibbs 2017).

The price to income ratio is a fundamental housing affordability indicator in a specific location. This is the ratio between median family disposable incomes to median house prices which is expressed in from of a percentage or in form of year of income. Sometimes the ratio is compiled separately for termed attainability and first-time buyers. Where the ratio is applied to the individuals it forms a fundamental component in relation to decision of mortgage lending. It has been argued by Bryant (2017) that the house prices in Sydney are about twelve times the average annual income of the citizens.  The price to income ratio in relation to a few cities in Australia is provided through the below graph.

House Price to Income Ratio

 

House price to income ratio

Source: (Bryant 2017)

It is an established fact the price of properties in Australia is among the highest in the world. However the arguments which have been provided that the property market in Australia is becoming affordable have been rejected evidently by various experts on the issue.  It has been stated by McLaren, Yeo and Sweet (2016) that the five biggest cities in Australia have "severely unaffordable" market in relation to housing.  According to the report set out by the housing affordability think tank Demographia Sydney is the second worst ranked city in relation to house prices which are almost 13 times more than the median household income. Only Hong Kong has worse numbers as compared to Sydney where the ratio is 20 times more than the median household income. The numbers have been depicted through the table provided below.

 

Housing Affordability in the World

Source: (Cox, W., Pavletich and Hartwich 2017)

To the contrary it has been stated by Minnery (2017) that the finding carried out by Demographia is not correct. However the figures suggested in this report does not depict that housing is affordable in Sydney. The report provides that the prices of dwelling in Sydney are nine times more than the actual household income. The blame in relation to this situation is to be imposed on urban commitments. All the major markets in Australia which have a urban-containment policy have been subjected to severely affordable housing.  It has been further argued that all markets which have a severely unaffordable housing have an urban commitment and restrictive land use regulation police. This is a form of policy through which the density of housing is enhanced by allowing the building of more apartments in residential areas. The policy also imposes restrictions upon the building of new houses in the outskirts of the city.  It has been argued by Bentley et al (2016) that the general unfavorable housing affordability in Australia is significantly different and contrary to the affordability which was present before such measures had been implemented by the government. There have been suggestions provided based on the economic concept of demand and supply that the increase in supply will ensure that the price of housing in Australia is decreased due to the decrease in demand. It is not as easily done as said because it is difficult to manage the demand in relation to housing in Australia. The problem can be addressed by providing for more medium-density dwellings which can be built in the outer and middle fringe areas, which can address the problem of strong population growth in Australia. However these suggestions cannot be implemented cheaply as a appropriate level of infrastructure in such areas have to be built which includes but are not limited to roads, services, hospitals and schools. 29 percent of the income which is earned by an average citizen living in Sydney is spent on housing rent. Although those people who live on rent have with themselves increased disposable income, they are likely to miss out on capital gains as the values of such properties are subjected to timely appreciation (McCormack 2018).

The Reason for Australia Being So Expensive

It has been stated by Gurran and Phibbs (2017) that the reduction of price in relation to the property market in Sydney which had been depicted in the late 2015 with respect to the macro prudential tightening provided by the Australian Prudential Regulation Authority (APRA) can evidently be stated as ephemeral. There has been a significant reacceleration in relation to price gains and auction clearance rates. There has also been a rebound in relation to lending provided to the property investors. There has been a ridiculous 73% increase in the housing price in Sydney in the last five years. Thus in realation to such outcomes the housing markets of Australia and specifically NSW is causing angst high household debt and poor affordability.

City dwelling prices Sydney and Melbourne

Source: (Gurran and Phibbs 2017)

It has been argued by Pettit, Tice and Randolph (2017) that Australian housing is overvalued. Based on the ratio of rents to house price which is adjusted for inflation in relation to long term Australia houses are overvalued at 39% and units are over valued at 13%.  As stated by 2017 Demographia Housing Affordability Survey, median multiple of household income to house prices in a city having one million people is 6.6 times in Australia as compared to 4.5 in the UK and 3.9 in the US. In addition the ratio is 12.2 times in Sydney alone. The following table shows the ratio of house price and rent.

 

Ratio of house price and rent

Source: (Thomas and Hall 2016)

There have been primarily two drivers in relation to the growth of Australian home prices in the last two decades.  The first of these drivers are the change form high to low interest rates which has enhanced the scope of borrowing and bargaining power. This situation has taken Australia to the top position in the OECD countries in relation to household debt to income ratio. The second reason has been that of low supply with respect to the high demand. The cumulative short falls which underlie demand built up by 2015 is depicted through the below graph (Bryant 2017).

 

Cumulative short falls

Source: (Baker, Mason and Bentley 2015)

It has been stated by Jacobs (2016) that low income Australian is subjected to significant detriment with respect to owning a property in Australia.  The purchase of a house in Australia is one of the most significant financial decisions which are made by households in Australia. The property is one of the most valuable assets owned by the citizens. However the rate at which the income of Australians is increasing is much slower as compared to rise in house prices. This situation is much more acute in NSW. The prices of dwellings are Sydney is much more than compared to other areas of NSW. There has been significant increase in the dwelling prices in Australia over the last four decades. The amount which the house holds willing to pay in relation to a dwelling is the household income. It has been stated by (McLaren, Yeo and Sweet 2016) that a serious housing crisis is faced by people in Sydney. It has been argued by Pettit, Tice and Randolph (2017) that the house prices in Sydney are about twelve times the average annual income of the citizens. It has been pointed out that Australians are being tangled in the classic "Ponzi scheme". It has been suggested by the report that the average first time buyer in Sydney will now require nine years for saving deposits which was only three years in 1975. The situation may lead the new generation into over-leverage mortgages which they cannot afford which would leave the hoses of their parents exposed. This loan guarantee strategy is essentially pyramid or Ponzi finance. Many parents are subjected to extreme risk in situation where their children will find it difficult to repay the loan. Many people in Australia are asset rich but income poor. There are only a few people who have access to adequate savings and other liquid assets on hand for the purpose of complying with their legal obligation to pay without being in the need to sell their houses (McCormack 2018).

Conclusion 

Thus form the above discussion it can be concluded that there is a significant problem in relation to housing affordability in Australia and specifically NSW and Sydney. The expensive housing market of Sydney has forced emergency worker, teachers and nurses to leave the city and live in cupboards which have put the hospitals and schools at a staff shortage. People having low income are not able to afford a house in Sydney’s inner-city suburbs. There is a significant gap between the level of income earned by the individuals and the prices of dwelling in the country. The ratios of house prices to household incomes are 13 times higher as suggested by reports in Sydney. The rate of growth in income as compared to the rate of growth in housing prices is much slower. The two reason for the soaring prices is the change form high to low interest rates which has enhanced the scope of borrowing and bargaining power and the low supply with respect to the high demand.

  • One of the primary recommendations in relation to addressing the problem is in relation to introduction of macro prudential measures to tighten standards of lending. This may lead to a further growth in 10% growth cap on the lending stock to investors along with tougher debt serviceability tests. This would also reduce the risk of financial stability where it is early to take into consideration the rising rates.
  • In addition policies to support poor housing affordability have to emphasize on boosting new supplies, specifically in relation to lagging standalone homes. This may also include relaxation of the restriction in relation to use of land, faster releasing of land, enhancing the process of approval and striving for greater decentralization. The issue is majorly related to a state issue. In addition polices which have the purpose of enhancing existing house stocks can also be helpful.
  • However policies such as allowance of first home buyers to access their super and increased grants to home owner grant are likely not to be successful. This is because these policies will have an effect of even higher prices unless the aspect of supply is fixed initially and will signify less in retirement.
  • Reforms in relation to taxes can also  be applied to address the problem. These reforms may include replacement of stamp duty with land tax, removing removal of capital gain tax discount which causes distortion in relation to the tax system and reduction of the rates of income tax can discourage negative gearing use for avoiding taxes

References

Baker, E., Mason, K. and Bentley, R., 2015. Measuring housing affordability: A longitudinal approach. Urban policy and research, 33(3), pp.275-290.

Bentley, R.J., Pevalin, D., Baker, E., Mason, K., Reeves, A. and Beer, A., 2016. Housing affordability, tenure and mental health in Australia and the United Kingdom: a comparative panel analysis. Housing Studies, 31(2), pp.208-222.

Bryant, L., 2017. Housing affordability in Australia: an empirical study of the impact of infrastructure charges. Journal of Housing and the Built Environment, 32(3), pp.559-579.

Cox, W., Pavletich, H. and Hartwich, O., 2017. 13th annual demographia international housing affordability survey: 2017.

Gurran, N. and Phibbs, P., 2017. Planning reform for affordable housing supply. Planning News, 43(4), p.6.

Jacobs, K.A., 2016. Australia’s housing affordability crisis.

Langford, S., 2016. Housing affordability and the role of community housing providers. Parity, 29(10), p.25.

McCormack, C., 2018. Housing market: Family home in cities further out of reach. News Weekly, (3015), p.7.

McLaren, J., Yeo, A. and Sweet, M., 2016. Australia is facing a housing affordability crisis: Is the solution to this problem the Singapore model of housing?. Australasian Accounting Business & Finance Journal, 10(4), p.38.

Minnery, J., 2017. Politics, Planning and Housing Supply in Australia, England and Hong Kong.

Pettit, C., Tice, A. and Randolph, B., 2017. Using an online spatial analytics workbench for understanding housing affordability in Sydney. In Seeing Cities Through Big Data (pp. 233-255). Springer, Cham.

Thomas, M. and Hall, A., 2016. Housing affordability in Australia. Parliamentary Library Briefing

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